A product’s route to the market is one of the crucial factors every manufacturer considers in determining how to effectively access its customers. Of the various distribution channels, manufacturers often appoint a third-party distributor to undertake this function by entering into what are known as distribution agreements.
A distribution agreement sets out the contractual relationship between a supplier and a distributor detailing the terms under which the distributor may sell the supplier’s products in a given market. The supplier may be the manufacturer of the products or a distributor with rights to resell such manufacturer’s products.
What are the types of distribution arrangements in Kenya?
Distribution agreements take various forms, the most commonly employed in Kenya being exclusive and non-exclusive distribution agreements. An exclusive distribution agreement is one where the supplier only engages a single distributor to sell the products within a specified territory with an undertaking not to appoint other distributors or compete with the distributor by directly selling the goods to the customers in such territory. A non-exclusive distribution agreement on the other hand is one which allows the supplier to appoint multiple distributors within a specified territory and/or sell the products directly to the consumers.
What is the position of the Kenyan competition law in relation to distribution agreements?
The Competition Act, No.12 of 2010 (the Act) prohibits restrictive or anti-competitive trade practices which may affect trade within Kenya or which have as their object or effect the prevention, restriction or distortion of competition within the Kenya. Under the Kenyan law, distribution agreements are deemed to be vertical arrangements within the production or distribution chain. Consequently, they are capable of involving negative trade practices that impact on competition. Such practices in distributorship include, the unreasonable increase in cost of production or distribution of commodities resulting in higher market prices, price fixing on the selling price, mis-leading or deceptive advertising or any other trading conditions and setting of minimum prices in form of retail price maintenance.
To be compliant with the competition law, parties must be keen to ensure that the following potential anti-competitive provisions are avoided in their distribution agreement:
- Exclusivity provisions
Where a supplier controls at least half of the products in the market (i.e. a dominant market position), exclusivity in a distribution agreement may amount to a restrictive trade practice if it limits or restricts the distribution of the product, among other things. Moreover, such an exclusive agreement locks out other distributors where such a supplier abuses their dominant position by restricting output or access in another market thus reducing competition at that level.
The Competition Authority of Kenya (CAK) found Crown Beverages Limited (a Coca Cola-owned company) to have abused its dominant position by entering into exclusive agreements for the distribution of its popular beverages and mineral water brands which prohibited such distributors from stocking and selling other beverages from other manufacturers thereby barring healthy competition and market choice to consumers.
- Terms restricting the minimum resale prices
Restraint must also be exercised by a supplier not to impose fixed or minimum price requirements under which a distributor can resell the products. Such requirements amount to price fixing which is unlawful as it limits competition and disadvantages consumers.
Are there any penalties for anti-competitive practices in distribution agreements?
Under the Act, parties found guilty of engaging in restrictive trade practices or abusing their dominant position shall upon conviction be liable to a fine of up to KES. 10 million or imprisonment for a term of up to 5 years or to both. The CAK may additionally impose a financial penalty of up to 10% of the defaulting entities’ gross annual turnover in Kenya of the immediately preceding year.
Suppliers and distributors must therefore engage in fair trade practices which are compliant with the competition law and differentiate themselves from their competitors by offering better quality and product offering.
Would you like to learn more about this topic?
Should you have any enquiries regarding this article or any general queries on the subject matter, please do not hesitate to contact, Waringa Njonjo, Partner, Joy Kamau, Associate and Wangila Masinde, Lawyer, MMAN Advocates.
Disclaimer: This article has been prepared for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing on this article is intended to guaranty, warranty, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.