Distribution law in Russia

Are there any formal requirements upon concluding an Agency Agreement?

Under Russian law, an Agency Agreement between legal entities may only be executed in writing. Agency agreements between individuals may be executed both verbally and in writing. Optionally, parties to an Agency Agreement may also agree on its notarial certification.

Can the Commercial Agent bind the Principal?

Pursuant to an Agency Agreement, a Commercial Agent may be entitled to act on behalf of the Principal, including, among others, to conduct negotiations and conclude transactions, and, thus, may bind the Principal.

What are the primary duties of the Commercial Agent?

Typical obligations of a Commercial Agent are as follows:

• to act in accordance with lawful, feasible and clear instructions of a Principal, provided that the Commercial Agent may deviate from such instructions under certain circumstances (for example, when it is required by interests of the Principal and the Commercial Agent had no opportunity to get prior instructions from the Principal);
• to inform the Principal of any deviation in acting in accordance with the latter’s instruction as soon as possible;
• to carry out its obligations personally, unless the Principal agreed otherwise;
• to provide information on the progress of the execution of the Agency Agreement whenever requested by the Principal;
• to account to the Principal for all benefits the Commercial Agent derives from his/her activities;
• to prepare a report to the Principal on the progress of the agency either periodically, or for the entire term of the agreement.

What are the primary duties of the Principal?

Typical obligations of a Principal are as follows:

• to pay a Commercial Agent’s fee in the amount and in accordance with the procedure set forth in the agreement;
• to accept all the benefits and obligations incurred by the Commercial Agent for the Principal under the Agency Agreement; and
• to reimburse to the Commercial Agents expenses and/or provide the Commercial Agent with funds required for the performance of the agency.

How is the Commercial Agent paid?

The Commercial Agent can either be paid periodically during the performance under the agreement, or in a single amount upon the fulfilment of the agreement.

If the parties did not expressly agree on the amount of the Commercial Agent’s remuneration, such amount may be defined on the basis of amounts customarily charged for the performance of similar duties.

Unless the parties agreed otherwise, the Principal must pay to the Commercial Agent its fee within one week following the receipt of the Commercial Agent’s report for a respective period.

Can a del credere clause be inserted into the agreement?

A del credere clause is valid but must be executed in writing.

Duration of the Agency Agreement

Parties are free to decide on the duration of an Agency Agreement. Agency Agreements may be executed for fixed, as well as for indefinite terms.

Termination of the Agency Agreement

As general rule, any civil contract may be terminated by a mutual agreement of its parties. Furthermore, a contract may be terminated by the court in case of a gross violation of its terms by a party, or a material change of circumstances (unless parties excluded applicability of the latter). Other grounds for the (early) termination of a contract may be set in the law with respect to a specific type of contracts, or in the contract or another agreement between the parties.

According to Russian law, a Principal is entitled to terminate the Agency Agreement at its own initiative at any time, subject to the reimbursement of expenses of the Commercial Agent.

In its turn the Commercial Agent is only entitled to terminate the Agency Agreement concluded for a fixed term. Unless provided otherwise in the Agency Agreement, the Commercial Agent may not terminate the Agency Agreement at its own initiative, unless there are no general grounds for such termination (see above).

Also, in case the Commercial Agent is an individual, an Agency Agreement shall also be deemed terminated following his/her death or incapacity. In case the Commercial Agent is an individual entrepreneur, an Agency Agreement shall also be terminated in case of his/her insolvency.

Notice period

There is no general rule regarding minimum notice periods for the early termination of an Agency Agreement at the initiative of one of its parties. In case an Agency Agreement fails to specify such a notice period, an Agency Agreement is deemed terminated from the date when the respective notice was received.

In case an Agency Agreement is concluded for a fixed term, it may be terminated by a notice submitted at least thirty days before the contemplated date of its termination, unless the Agency Agreement does not provide otherwise.

Goodwill or other compensation

If an Agency Agreement with a Commercial Agent is terminated before the expiration of its term, and such early termination is not attributed to a breach by the Commercial Agent, the Commercial Agent is entitled to a compensation of its damages, including loss of profit, as well as to a proportionate amount of the Commercial Agent’s fee, and the Principal must also reimburse expenses incurred by the Commercial Agent up to the date of the termination.

In all other situations (including in the case of an early termination of a commercial Agency Agreement due to the Commercial Agent's breach) the Commercial Agent is not entitled to the compensation of its damages.

A Principal is entitled to the compensation of its damages in the cases when the Commercial Agent refuses to perform the Agency Agreement (early terminates the Agency Agreement) and such refusal is not attributed to the Principal’s breach of its contractual obligations thereunder, as well as when the Agency Agreement is being terminated due to the breach by the Commercial Agent.

In which cases does compensation not apply?

No compensation is due when the Commercial Agent is in breach (see above).

No compensation is due for any activities of the Commercial Agent undertaken after the Commercial Agent became or should have become aware that the agreement has been terminated.

Is a post-contractual non-compete obligation enforceable?

Russian competition authority and courts have not developed a consistent approach to post-contractual non-compete obligations. Respective clauses of Agency Agreements may be found unenforceable in Russia. In certain situations they may qualify as violating the Russian Competition Law.

Also, Russian law allows that an Commercial Agent and a Principle may agree to refrain from entering into similar agreements with third parties on specified territory. However respective obligations are not enforceable. A violating party may only be claimed to reimburse respective damages inflicted as a result of a violation.

What is the statute of limitation?

Any claim arising from an Agency Agreement is subject to a standard three-year limitation period, which starts from the date when a creditor became or should have become aware of the violation of its right. The parties may not alter the foregoing statute of limitation period in an agreement between them.

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Are there any formal requirements upon concluding Distribution Agreements?

Distribution Agreements are not regulated by any specific Russian law and there are no specific formal legal requirements for executing Distribution Agreements. Certain formal requirements can apply to particular Distribution Agreements if they contain elements of other specific types of civil contracts which are specifically governed by laws (i.e. sale-purchase, supply, services, agency and commission agreements, etc.). A Distribution Agreement must be concluded in a written form.

Can exclusivities be granted?

Generally, exclusivity clauses are rather often included in Distribution Agreements. Although they are not caught by the per se prohibitions of the Russian Competition Law applicable to vertical (distribution) agreements, which include, for example, prohibition on selling a competitor's products and fixing of a resale price (except for a maximum resale price, which may be determined), under certain circumstances such provisions may qualify as violating so-called ‘general' restrictions of the Russian Competition Law. In particular, an exclusivity clause may be interpreted as a refusal of one of the parties to act independently in order to benefit from the Distribution Agreement, which in its turn may qualify as a restriction of competition, which is expressly prohibited by the Competition Law.

The key difference between the application of the general restrictions and per se prohibitions is that the mere inclusion of such anti-competitive restrictions into a Distribution Agreement is not sufficient for it being qualified by the Federal Anti-Monopoly Service (the ‘FAS') as violating the law. The FAS needs to provide sufficient proof of an adverse effect on competition (actual or potential) resulting from a Distribution Agreement containing such a clause.

In any case, the exclusivity clause should not be structured as a prohibition of the selling of a competitor's products, except for entities carrying sales under a trademark or other means of individualization held by the seller or the manufacturer (for example, pursuant to a license agreement).

Also, in case one of the parties to a Distribution Agreement holds a dominant position on a certain market, an exclusivity clause included into such Distribution Agreement may be examined by the FAS more attentively, and its existence may add to a qualification of certain activities of such a dominant entity as violating the Competition Law by means of an abuse of its dominance.

Is a contractual non-competition clause enforceable?

The treatment of non-competition clauses in Distribution Agreements by the FAS has always been rather controversial and in most cases their enforceability and compatibility with the Competition Law is far from obvious. As of today, Russian court as well as administrative practice on this matter is rather thin.

This being said, in any case from the Russian Competition Law effectively prohibits to restrict a Distributor’s right to sell products of competitors of the seller.

Can Distribution Agreements include Minimum Sales Quotas?

In principle, Distribution Agreements may include Minimum Sales Quotas. But still such provision may result in a risk of being qualified as restricting the competition, e.g. by creating barriers to a market entry. The risks of infringement are significantly higher should the Principal hold a dominant position at the market. The basic recommendation is to refrain from using such clauses to the extent possible.

Can the Principal influence the resale price of the Distributor?

The Principal may only impose maximum resale prices. The prohibition relating to the fixing of resale prices is related to the fixing of minimum resale prices.

Also, the FAS is generally biased against fixing or recommendation of resale prices in Distribution Agreements, especially when such ‘recommended' prices are actually maintained by Distributors and/or Distribution Agreements provide for sanctions in cases when Distributors are non-complying with such ‘recommended' prices. In certain cases setting forth ‘recommended’ pricing in a Distribution Agreement was qualified as restricting of the competition and, thus, violating the Russian Competition Law.

At the same time, there are situations when fixing of resale prices is generally allowed. They are limited to:

• vertical agreements concluded between entities, when market shares of each does not exceed 20% of the market of the product in relation to which the agreement is concluded; or
• franchise agreements (which is not particularly relevant to Distribution Agreement discussed herein).

As far as the first exemption is concerned, please be advised that the market share is defined by the FAS. The FAS' market analysis often leads to arbitrary results and the relevant market may be narrowly determined.

Consequently, it cannot be fully relied on as in practice even if the parties believe that their market shares is below 20 % the FAS may come to different conclusion. To this end, it is advisable to avoid including ‘recommended' resale price maintenance clauses into vertical (distribution) agreements (of course, except for maximum resale prices).

Is a notice period necessary?

There is no general rule regarding minimum notice periods for the early termination of a Distribution Agreement at the initiative of one of its parties. In case an Distribution Agreement fails to specify such a notice period, a termination notice should be served within reasonable terms, normally 30 days prior to the termination date.

Are there any formalities to be completed?

There are no formal requirements on the procedure of the termination a Distribution Agreement. As a rule such termination must be done in writing, for example, by an exchange with notices, or conclusion of a termination agreement between the Parties.

Is there any kind of compensation or goodwill indemnity to be paid?

There is no statutory right to a compensation. Parties are free to provide contractual rights to compensations.

Is bankruptcy a reason for termination?

Liquidation of a legal entity following respective bankruptcy proceedings leads to the termination of its obligation without their assignment to third parties. Therefore, in case of a bankruptcy of one of its parties a Distribution Agreement shall be deemed terminated from the moment of the completion of the bankruptcy proceedings.

What is the statute of limitations?

Any claim arising from a Distribution Agreement is subject to a standard three-year limitation period, which starts from the date when a creditor became or should have become aware of the violation of its right. The parties may not alter the foregoing statute of limitation period in a Distribution Agreement between them.

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