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.
Dominant Position and the Distributor's Standing
When building a distribution network, the assessment of dominance matters as well. Under the law, absent other evidence, an economic agent is not considered dominant if its share on the relevant market does not exceed 40 percent. This threshold serves distributors as a direct legal benchmark for evaluating their own market power and the durability of their negotiating position.
Collective dominance is regulated in greater detail: where the combined share of no more than 3 economic agents exceeds 50 percent with each agent's share being at least 15 percent, or where the combined share of no more than 5 largest agents exceeds 80 percent together with each share of at least 15 percent, each of them may individually be regarded as dominant — provided they do not face significant competition within and beyond the group.
Interdependent Persons and Control
Analysing distribution networks also requires the definitions of interdependent persons. The law assigns there persons who are simultaneously members of the supervisory boards of different agents, hold significant voting rights, or fall among the interdependent persons provided for by the Tax Code. Control, in turn, means a position where a person can substantially influence an agent's decisions — for instance through the right to appoint a majority of the governing body or ownership of a significant part of operating assets. These concepts determine which companies are treated as a single group and how their market shares are counted.
The law also provides for a cooperation programme — a special rule under which a person, having satisfied the conditions established by law, may be fully or partially exempted from the fine for a competition-restricting agreement. For a distributor this means that risk can be managed through a properly structured programme, although such an exemption rests on strictly formalised conditions.
Frequently Asked Questions
Which agreements are vertical?
Agreements concluded by parties operating at different levels of the production or distribution chain and covering the conditions of purchase and sale — the classic example is a contract between a supplier and a distributor.
Below which share is a vertical agreement protected?
Where each party's market share on the relevant market does not exceed 15 percent, the prohibition does not extend to the agreement — except for the excluded cases of price fixing and market allocation.
What happens if a contract violates the law?
An agreement restricting competition is void unless a statutory exception applies — the offending clause can be set aside in court, and the parties also risk sanctions.
When is an agent not considered dominant?
Where, absent other evidence, its market share does not exceed 40 percent. For collective dominance the law sets separate thresholds according to the number of parties and their shares.
How We Help on Legal.ge
The clauses of a distribution agreement often determine business success while carrying antitrust risk. The specialists of Legal.ge assist with a competition audit of contract terms, the assessment of markets and shares, and the reworking of problematic clauses. Contact us — we will review your situation and design a legally sound solution.