Author: LegalEase Solutions
- Question Presented:
Whether is permissible under Indian law to include the following provision in a Distributor Agreement, where the Distributor is being granted the right to sell certain defined products in India?
“Article 7. Prohibition of Dealing in other Products:
DISTRIBUTOR shall not during the term of this Agreement buy, sell,
distribute, manufacture or deal in any products which are similar to or
competitive with the Products covered by this Agreement without the
prior written consent of MANUFACTURER.”
- Short Answer:
Possibly yes, as the restriction is not absolute and may be deemed an ancillary restraint that would fall short of causing or to be likely to cause “an appreciable adverse effect on competition in India.”
The Competition Act, 2002, prohibits anti-competitive agreements. Section 3 of the Act prohibits agreements which restrict the production, supply, distribution, acquisition or control of goods or provision of services, which cause or are likely to cause an appreciable adverse effect on competition within India. A party that breaches these provisions may be liable for penalties.
Chapter II. Prohibition of agreements
Anti competitive agreements
- (1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.
(2) Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void.
(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which—
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or provision of services;
(c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;
(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition:
Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
(4) Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including—
(a) tie-in arrangement;
(b) exclusive supply agreement;
(c) exclusive distribution agreement;
(d) refusal to deal;
(e) resale price maintenance,
shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.
Explanation.—For the purposes of this sub-section,—
(a) “tie-in arrangement” includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods;
(b) “exclusive supply agreement” includes any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person;
(c) “exclusive distribution agreement” includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goods;
Therefore, a clause in a contract which prohibits a distributor from dealing in any goods other than those of the seller would per se be in violation of the Competition Act.
Although the Competition Act was enacted in 2002, Section 3 of the Act was enacted only recently. Therefore, there is a dearth of case-law interpreting Section 3 of the Act. However, the clause in our contract does not appear to violate Section 3 of the Act as it is not an absolute restraint. It is not a total prohibition on competition. It merely mandates that the distributor take prior written consent. Since there is no total prohibition, the restraint arguably becomes merely ancillary and does not “cause an appreciable adverse effect on competition in India.” .